“PYRAMID SCHEMES ARE ILLEGAL”
We’ve all heard MLM reps talk about how pyramid schemes are illegal. That seems to be their rebuttal to a lot of anti MLM advocates. In my opinion, I do think this has come from the uplines, who most likely got it from the head honchos themselves. The reason why we hear this rebuttal more and more, is because the anti MLM movement is growing exponentially. Just recently Monat had their convention and top leaders along with motivational speakers addressed the “haters.” Isabella Lanter made a great video about that, click here to watch it.
If your company was so great and if you were truly doing well, why would you address this at all? Not to mention, why would you add that to your acceptance speech? Oh, and I also put haters in quotes because we aren’t haters. We are advocates for consumer protection, there’s a huge difference. In today’s post we will be going over how to combat this narrative. It’s actually a lot easier to combat this narrative than you may think.
Related: An Intro to the Anti MLM Movement
THE DIFFERENCE BETWEEN AN MLM AND A PYRAMID SCHEME
There is a great article listed on the FTC’s website that I highly recommend you read (click here). In my personal opinion, I think that MLMs are just legal pyramid schemes. However, technically, there is a difference where one is legal and one is not. Really the only difference is that one sells products, and that’s the loophole that MLMs get away with. Although, just because they sell a product, doesn’t necessarily mean that they are operating legally.
I’m not accusing every MLM of being a full blown pyramid scheme, but there are a lot of things in this world that are illegal but still happen on a daily basis. Certain substances are illegal, but we still have dealers. Murder is illegal, but we still have murderers and serial killers on the loose.
However, the biggest detail when it comes to an MLM being legal in the FTC’s eyes is when it comes to compensation, the reps need to be making more off of the products, rather than recruiting. Just with that statement alone, I’m sure you can see why so many people call MLMs legal pyramid schemes.
Here is what the FTC has to say about what a pyramid scheme actually is:
Pyramid schemes are scams. They can look remarkably like legitimate MLM business opportunities, but if you become a distributor for a pyramid scheme, it can cost you and your recruits — often your family and friends — a lot of time and money that you won’t get back.
The promoters of a pyramid scheme may try to recruit you with pitches about what you’ll earn. They may say you can change your life — quit your job and even get rich — by selling the company’s products. That’s a lie. Your income would be based mostly on how many people you recruit, not how much product you sell. Pyramid schemes are set up to encourage everyone to keep recruiting people to keep a constant stream of new distributors — and their money — flowing into the business.
Often in a pyramid scheme, you’ll be encouraged or even required to buy a certain amount of product at regular intervals, even if you already have more inventory than you can use or sell.
You may even have to buy products before you’re eligible to be paid or get certain bonuses. You also may have to pay repeated fees for other items, like training sessions or expensive marketing materials. In addition, the company may say you can earn lavish rewards, like prizes, bonuses, exotic vacations, and luxury cars. However, it often turns out that you have to meet certain product purchase, recruitment, training, or other goals to qualify for the rewards, and only a handful of distributors ever qualify.
Eventually, most distributors find that no matter how hard they work, they can’t sell enough inventory or recruit enough people to make money. They also can’t keep up with required fees or the inventory purchases they need to make to qualify for rewards, and they can’t earn enough money to cover their expenses. In the end, most people run out of money, have to quit, and lose everything they invested.
Here are some warning signs of a pyramid scheme:
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- Promoters make extravagant promises about your earning potential. Stop. These promises are false.
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- Promoters emphasize recruiting new distributors for your sales network as the real way to make money. Walk away. In a legitimate MLM program, you should be able to make money just by selling the product.
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- Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company. Leave by the nearest exit. Any company that tries to pressure you to join is one to avoid.
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- Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards. If you see this happening, keep your money.
Source: FTC.gov
Just because an MLM hasn’t been deemed a pyramid scheme, doesn’t mean it isn’t operating like one.
Not all of the points listed above necessarily happen in every single MLM. This is because when it comes to inventory, a lot of MLMs now sell everything online. Which means the MLM rep just sends their customers links to their website. They don’t need to hold inventory, which is good. When you need to hold inventory this causes inventory loading which is not allowed within MLM companies. I made a video explaining this further (click here).
However, pyramid schemes are eerily similar to the MLMs that we see today. Also, just because an MLM is still considered a legal MLM, does not mean they won’t be deemed a pyramid scheme in the future. There have been plenty of MLMs that have been shut down or forced to restructure due to them being deemed a pyramid scheme. Two examples I can think of, off the top of my head are Herbalife and Advocare. Herbalife was forced to restructure, and Advocare was deemed a pyramid scheme and forced to restructure as well.
Related: Why the BITE Model is important to research when looking at MLM companies.
A PYRAMID SCHEME IS NOT DETERMINED BY THE SHAPE OF THE BUSINESS STRUCTURE
I have made jokes in posts and on my channel where I refer to MLMs as triangle like structures. There’s even merch that I sell (click here to shop) that says triangle like structure on it. Although, I’m very well aware that a pyramid scheme is not determined by the shape of the structure. If we were to look at every industry, most industries are in the shape of a triangle. I think that’s why a lot of MLM reps try to argue that your 9-5 is a pyramid scheme because you have the CEO at the top, then the VP, and it trickles down into the bottom of the triangle having the minimum wage paid employees.
That rebuttal is just, well, uneducated. I usually don’t use ad hominem attacks, but if you think that’s some kind of proof that your MLM isn’t a pyramid scheme, I feel very sorry for you. Also, why is it that in order to stick up for the company and industry you’re a part of, you have to compare it to other industries? That alone shows that you don’t have true arguments and are using whataboutism.
Another rebuttal I hear is that you recruit people into other jobs so why is recruiting so bad in MLMs. The reason why is because you’re recruiting this person off of a facade and a lie. You’re recruiting them by selling the dream lifestyle. These reps target people at their most vulnerable stages, whether that be they just had a baby, they’re paying off debt, or they can’t even put food on the table. The recruits do not make a dedicated salary or commission, and they aren’t guaranteed anything within the MLM. In addition, the upline benefits significantly off of their recruits. A lot, if not most, bonuses aren’t achievable without creating a team.
HOW TO COMBAT THE NARRATIVE
I hope that the information in this post has been able to help you combat this narrative a little bit better. It truly breaks my heart that some of these reps are so indoctrinated into the MLM that they think their rebuttals prove something. A lot of these rebuttals are just regurgitated from their uplines and teams. They hear other MLM reps saying these things and use it as their own. Because critical thinking is completely out the window when you’re in an MLM, the reps won’t stop to think about what they are actually saying. They don’t stop to think how none of it makes any logical sense.
Related: Influencer Marketing vs. Affiliate Marketing vs. Multi Level Marketing
Disclaimer: This is all based on my opinion and research I have done. Please do your own research and fact checking. Section 107 of the Copyright Act provides the statutory framework for determining whether something is a fair use and identifies certain types of uses—such as criticism, comment, news reporting, teaching, scholarship, and research—as examples of activities that may qualify as fair use. Second Disclaimer: Anything said in this post is for entertainment purposes, and my opinions.
Great resources to further your research and education:
Jon M Taylor’s (MBA, PhD) Study: The Case for and against Multi Level Marketing
AARP’s Study of Multi Level Marketing: Profiling Participants and their Experiences in Direct Sales
Steven Hassan’s BITE Model
FTC’s article of a Pyramid Scheme vs MLM
The rest of my anti MLM Mondays posts can be found by clicking this link.
My Anti MLM Educational & Commentary content on Youtube.
